Competition Begins To Boil For Challenger Banks

The U.K.’s challenger bank landscape is spreading since regulators have welcomed new competition into the retail banking space. Market entrants are looking to disrupt across a range of segments of the banking industry, but SME finance has become a popular target for these innovators.

It seems that every few weeks another FinTech is seeking a banking license in the U.K. Earlier this year, financial advisors at deVere group revealed plans to launch their own private bank for SMEs, an entity that would mark the first private bank owned by an independent financial advisory firm. Just last month, Virgin Money prompted renewed talk of launching its own challenger bank that would similarly focus on small businesses.

These challenger banks aren’t just disrupting the U.K.’s Big Four banks — Barclays, HSBC, Lloyds and RBS — as FinTechs that lend and provide accounting and other financial services similarly populate the U.S., the EU and other landscapes across the globe.

A new report by Burnmark is looking to make sense of an ever-crowding challenger bank ecosystem. In an article penned by Burnmark cofounder and CEO Devie Mohan Tuesday (April 18), the company explores the more than 30 FinTechs that have stepped into the financial services world to challenge the U.K.’s main street banks.

Its report, The Challenger Bank Battlefield, analyzes these players not only as competition heats up, but as innovation spreads, too.

“The challenger banking industry is one of the most fascinating examples of digital empowerment within financial services, thanks to its pace of innovation and the heavy focus on technology-driven customer centricity,” Mohan wrote. “Challenger banking has evolved to be a microcosm of FinTech trends and innovation — with the sheer level of competition and diverse trends in the various regional markets making it an ideal ecosystem for observing.”

Analysis of this landscape reveals a few common threads across the industry. For one, most of these companies are looking to threaten the dominance of traditional players by offering a streamlined, simple customer experience, Mohan explained. Many of these companies take a digital-first approach to their offerings, and that means a digital approach to compliance, too.

Regulations like Know Your Customer (KYC), for instance, mean challenger banks must get creative with their compliance efforts.

“In the U.K., most KYC for challenger banks is handled by scanned ID documents,” explained Mohan. “In Asia and Africa, digital banks prefer to use the existing vast network of corner shops, cafes (urban) or field agents (rural). Sometimes this is a mix.”

Biometric authentication, too, is becoming increasingly popular with challenger banks, he said, with many FinTechs often more able and willing to experiment and test innovative technologies surrounding compliance, authentication, identification and other security initiatives. This digital approach also enables challenger banks to make new uses out of customer data. With information coming from all directions, from social media to behavioral analytics, challenger banks can target new customer segments and customize their clients’ experiences.

According to Mohan, this enables businesses to reach niche segments of the market that are often considered too difficult and expensive for larger, traditional FIs to pursue.

Take, for instance, SME lending. Small businesses are often considered too costly and not profitable enough for a traditional lender to invest time, money and innovation. But some challenger banks and FinTechs have begun to aggregate “alternative data” to underwrite small business loans or to take a digital-first to the SME lending process, enabling them to reach this market.

Several challenger banks have surfaced with their eyes on the small business segment, like Amicus Bank, which applied for a banking license only late last year.

The challenger bank itself is growing competitive, says Burnmark. There are four key categories of challenger banks today, each with its own increasing level of competition: niche disruptors, digital enhancers, value redefiners and industry transformers.

And as competition increases, mishaps are also bound to happen. Last year one U.K. challenger bank, Shawbrook, saw its CFO Tom Wood resign following an asset finance breach and revelations of loans that seemed to not have met the bank’s underwriting criteria.

“It will be interesting to see how the challengers the report analyzes evolve over time and how consolidation, partnerships and increase in the breadth of offerings affect the market as well as individual players,” wrote Mohan. “What we need to remember is this is a constantly evolving space — new challenger banks are emerging every month (or week) and features are being added or eliminated to achieve the right balance of customer centricity and scalability.

“The success of this space will determine the future of banking and money,” he continued, “despite the unknowns.”